Bitcoin has gained massively against the USD in recent times, with its price soaring past $7,000 for the first time in early November 2017.
Whilst this will be good for those who “bought” Bitcoins when they were priced at around $500, the question everybody has is what’s going to happen to them moving forward.
Obviously, no one has a crystal ball, and do anything written in this article should be treated as an opinion, nothing more. However, there are certain predictors which we can use to identify any of the potential patterns that the asset class may have. Those familiar with the financial world will likely be familiar with a large number of these predictors… those who are not as experienced have likely already fallen for the hype.
This tutorial aims to dispel many of the myths surrounding Bitcoin, cryptocurrency and the general concensus towards “Blockchain”. Whilst NOT financial advice, it’s certainly the case that some of the principles that govern the financial markets still apply to the new age of decentralization…
What Is Bitcoin?
Bitcoin is a “decentralized” currency which basically allows users to buy and sell products/commodities/services without the need of a bank.
The problem with the current system (as evidenced by rampant inflation and governments taking on masses of debt) is that it’s very easy for central banks and governments to tamper with it. Not only does this mean that “bubbles” can be let to grow (just like in 2008), but also that the power of how to resolve them rests at the feet of a few individuals. These people not just determine the future of an economy, but also the living standards for millions – even billions – of people through their actions & decisions.
The problem that “bitcoin” was designed to solve is that ALL financial transactions currently rely on fiat currency (legal tender issued by a government). Be it through a bank or with paper, this currency is issued by the government and is designed to be a way for them to control the ebb & flow of an economy. Since we don’t rely on the gold standard any more, the BIG problem with this is that it can simply be printed, as is what happened in the likes of Venezuela. This leads to hyperinflation.
Anyway… Bitcoin is not actually a currency. It’s a financial ledger. Or – if you will – it’s a database of fiscal transactions. The way that the transactions are encrypted is determined by the “Bitcoin” algorithm, hence the name. BusinessInsider.com said this about that.
The main deal with Bitcoin is that it’s built on a technology called “Blockchain”. This is what’s known as a decentralized database, which means that NO individual/central party has control of the data. In order to fully understand Bitcoin, you need to understand Blockchain…
Blockchain was developed in 2008 by a group of developers who released the product as an “open source” solution (meaning the source code was available for anyone to use).
The idea was based on two types of already existent technology — “torrent” files & “GIT” source code management. I’ll explain both of these in a second.
The most important thing to appreciate about Blockchain is that instead of tying data to a SINGLE provider / source, it opens it up to 100’s or even 1000’s of sources (called “nodes”).
These nodes give the ability for a database of data to be stored across a network of computing infrastructure, rather than a single system. Whilst this may not seem like a big deal, it’s implications for CERTAIN APPLICATIONS is massive.
This lies at the core of whether people think “Bitcoin” will be adopted by the mainstream… the reality is that rather than devouring many of the incumbent computing processes (such as database management etc), what blockchain will likely do is open the door for a MUCH wider array of “decentralized” applications.
Bitcoin itself is an example of one of these apps. Rather than having a server/client relationship, the Bitcoin “application” allows users to transact data peer/peer. This means that you don’t need any central provider to manage the transaction, thus removing the need for a government to regulate it.
Whilst this sounds dandy, it’s not the whole picture…
How Blockchain Works
To understand the potential for this stuff, you need to understand how Blockchain works on a fundamental level (which most people don’t).
The technology powering “blockchain” is nothing new. There are two types of technology which have already proven their use value in the world – “torrent” and “GIT”. Blockchain works with a combination of both of these technologies… allowing users to gain access to data from a wide array of sources (torrent), and store it in a sequentially updating system (GIT)… A little intro to it’s history can be found here.
The way Blockchain works is to basically make data “3D”. This means that whenever you use a piece of data today (be it a file or data stored online), what you’re doing is accessing a piece of static information that is frozen in time. This information will only change if you make the effort to do so. It is intrinsically rigid and used in a “layered” fashion inside applications (IE when it’s accessed, it cannot change).
What blockchain does is to basically give data the ability to “change”. It does this by creating small databases of data known as “chains”. These “chains” can store any type of data (be it large files or small instructions), which it does so as “blocks”.
VERY similarly to “GIT” (which stores its data as a “repo”), Blockchain is able to “save” new blocks onto each “chain”. With GIT, a programmer can create a repository which stores a number of files and folders. Each time you update a file/folder, the change is logged by GIT.
At the end of the time you wish to enact changes, the programmer is able to “commit” them to the repository, creating a “version” of the repository’s files. This “commit” is then “pushed” to a central server (on the likes of Github) which allows other developers to “pull” the latest version of the files.
This is EXACTLY how blockchain works, except for one crucial difference – instead of ONE server, there are 100’s or even 1000’s in a “network”. This is how “torrents” work – allowing the user who “pushes” a new “block” onto a “chain” to update the entire spectrum of files stored around the world.
The importance of this cannot be overstated.
In a nutshell, it means that data (files/database records) can now be DYNAMIC. No longer will they be listed in the static fashion as you would see in the likes of a telephone directory… the decentralized nature of blockchain networks means that ALL data references can be kept completely up to date no matter what.
This has several implications for business, beyond the obvious idea that their data infrastructures could be overhauled…
How This Translates Into The Business Environment
People often cite the role of “business” as that of making money. This is incorrect.
The role of business is to facilitate the transaction of value.
Whether you’re a fur farmer in the Canadian North, a gold miner on Mars, or a camel rider in the Arabian desert… the role of a “business” is to take goods, products and services to a market. This obviously means that those products will be bought by eager customers, but what most people miss is WHY those products are bought in the first place.
Products, services and goods are bought because they have an underlying “value” to the buyer. And what’s amazing is that this “value” is entirely dependent on the person ascribing it. In other words, the same fur coat may keep a hunter warm would be used as a status symbol by a wealthy woman. The product may be the same… but the value (and thus price) is entirely different.
The problem with the likes of Blockchain is that it’s difficult to associate a “value” to it when it has so little implication & adoption in the current climate. This is the major stumbling block for the technology currently… however, it’s not without reprieve.
The main problem blockchain solves is data integrity. With most businesses relying on ONE source of data (a database server) which provides ALL their information is commonplace.
The risk to this is several-fold. Firstly, it leaves it vulnerable to attack (as seen by the recent WannaCry infection as well as countless “data breaches” in airlines etc). Secondly, the data is EXTREMELY rigid (doesn’t change). And lastly, it means the ONLY way to access the data is through a single service (typically a server).
All of the problems cited above can be solved with a “blockchain” decentralized data infrastructure. By splitting the responsibility for data integrity between 100’s of systems (known as “nodes”), the business doesn’t need to worry about a single server getting hacked. Because blockchain encourages encryption (which is essentially what each of the “coins” are — encryption algorithms), if a “node” is hacked, the chances of the hacker being able to read the data are slim. Check out this intro to blockchain technology.
On top of this, decentralized applications can be constructed on top of the blockchain network in order to facilitate the dynamic altering of data. For example, a blockchain-enabled email application will allow a company to store emails on ALL the nodes in their blockchain network… but most importantly, each time a new “message” (block) is added to a “chain”, ONLY that block has to be downloaded onto the client systems (rather than ENTIRE FILES that had to be done before).
The Future Of Bitcoin
The most important thing to appreciate is that the “future” of Bitcoin is NOT as rosy as many people (who typically have a vested interest in keeping its price high) are saying.
Like ALL technological progress in the past, the applications for Bitcoin are narrow (as adoption grows, the applications multiply… but ONLY with adoption). As a pioneer technology, adoption is nowhere near what people need for it to fulfil its true potential. And that’s the problem.
The current “price” of Bitcoin is indicative of a speculative BUBBLE – whereby many secondary market traders are simply buying-and-selling the “coins” in order to generate quick profits. Some people are wondering if it’s not just going to blow up. As less experienced “investors” buy the coins at higher prices, the ones who bought at a lower price make a profit. It has “ponzi” and “pyramid” scheme written all over it.
However, that’s not to say that Bitcoin, or the Blockchain technology which powers it, is a scam. Far from it. The underlying reality is that in order for “Bitcoin” to be accepted – it needs to break several roadblocks… most notably its ability to “store” value. Entrepreneur had this to say about the state of the current market and what to do to participate.
The main problem cited by institutional investors – most notably Jamie Dimon of JPMorgan – is that “Bitcoin” isn’t a currency because it doesn’t store value. Learn more about the basics of cryptocurrency. It’s a financial ledger stored on 1000’s of systems. As such, the idea that it has a price is either incorrect, or there’s a part of the picture some people are not seeing.
The point is that currency works by permitting (encouraging) trade between two or more parties. One party may have furs, the other may have computers. Because the two products are not interchangeable, the “currency” acts as a way to determine a base level of value between the two. For example, a computer may be worth $2,000 to a business, whereas the furs $1,500 to a wealthy woman.
By trading the products for the currency much rather than the other product, what happens is that the currency gains a value of its own. You’re able to transact the currency for a range of other products, which allows you to form an opinion on what your product is worth in the context of a wider economy (hence, a “market” is formed). Wonder if it’s not just a gamble though.
This is why the USD is the most traded currency on the planet – you know that if you are in the depths of China or the urban sprawl of Manhattan, your USD will be accepted as a form of exchange… AND the level of exchange you get for it (buying power) is VERY high.
Bitcoin has no such buying power. The products/services which can be exchanged for a “Bitcoin” are negligible. There is no “secret sauce” which has been created SOLELY around Bitcoin (yet). What this sauce looks like is what will determine the future of the product.
It’s our opinion that Bitcoin will basically birth a marketplace like Alibaba – a central stack of product/service providers who use the Bitcoin protocol to record their financial transactions. The VALUE of the transactions (IE how much they are worth) will still happen with local currencies.